What’s new in production

	Vol. 230 No. 4
DAVID MICHAEL COHEN, MANAGING EDITOR, DAVID.COHEN@WORLDOIL.COM

Cap and trade’s fall from inevitability

Just a few months ago, it seemed so inevitable. The presidential nominees of both parties supported a cap-and-trade program for carbon emissions. The US Senate came close to passing the most aggressive global warming bill ever to reach its floor, despite public outrage over $4/gallon gasoline prices and a lack of support from the sitting US president. Carbon-heavy industries showed a growing willingness to pay to emit; the Regional Greenhouse Gas Initiative, a program of 10 Northeastern states, held the largest carbon auction ever in September 2008, raising over $38 million at $3.07 per ton of CO2. (The initiative’s third auction, last month, raised $117 million.) With the election of Barack Obama and big Democratic gains in Congress, the probability of the US enacting a mandatory cap-and-trade system this year seemed to go from likely to certain.

Fast-forward to the present, and an increasing number of observers say such legislation has little chance of passing in 2009.  What has changed so quickly? Certainly not the perception of need. Setting aside the question of scientific consensus, the political consensus in the US that global warming is real and is caused by human activity has never been stronger. This consensus has come to include even the natural enemies of carbon regulation—our industry.

But while the major oil companies have largely gone on the record stating that government should take steps to lower carbon emissions, exactly what steps should be taken is hotly debated. While the US Climate Change Partnership—which includes ConocoPhillips, BP America and Shell Oil—has backed a cap-and-trade proposal consistent with the one Obama has proposed, ExxonMobil CEO Rex Tillerson has come out strongly against the plan, lending his support to a carbon tax instead.

Some critics have labeled Tillerson’s statements a cynical ploy designed to scuttle cap-and-trade, which has long been considered more palatable to Republicans than a tax because of its “market-based” approach. But his preference for a tax puts him in league with Al Gore and other environmental activists. On the legislative side, Rep. John Larson (D-Connecticut) has introduced a carbon tax bill that would be offset by reductions in payroll taxes—in Gore’s idiom, taxing “what we burn, not what we earn.”

A carbon tax avoids what may be cap-and-trade’s biggest liability in the current political climate: the complex derivatives market it creates for trading emission permits. Critics contend this market will be opaque to public scrutiny and easily manipulated, charges that will have a lot of weight with a public reeling from the collapse of the housing, commodities and financial markets. Exxon’s Tillerson hit a decidedly populist note with his recent statement that cap-and-trade “would create a new Wall Street of emissions trading.” Thus cap-and-trade’s bipartisan edge—its reliance on the private sector to bring emission levels down—has become its biggest political liability.

The critics also point to the European emission trading regime, whose first phase from 2005 to 2007 saw its carbon price plummet from a peak of €30 per metric ton to €0.10, and actually saw an increase in CO2 emissions. However, these failures are largely attributed to weaknesses that have been addressed in the second phase, such as the free distribution of too great a portion of emission allowances and reliance on the national governments to allocate them. The US could improve cap-and trade’s chances of working if it learns from Europe’s mistakes, for instance by ignoring calls to give large chunks of any carbon permits issued to the nation’s biggest utilities for free.

Cap-and-trade supporters also have a model to look toward in another mandatory national cap-and-trade program that has successfully reduced emissions at minimal cost within the US since 1995. The Acid Rain Program, initiated as part of the 1990 Clean Air Act, instituted an allowance market and decreasing cap for emissions of sulfur dioxide—the primary cause of acid rain—from electric power plants. Nitrogen oxide was later included in the program. By all accounts, the program has been highly successful. In 2002, SO2 and NOx emissions were down 35% and 33% from 1990 levels, respectively, according to a Bush White House report, and the actual cost to business and consumers has been about a quarter of the predicted cost, as the program’s free-market approach allowed regulated plants to find the most cost-effective means of meeting their emissions targets.

Of course, the Acid Rain Program only regulated 110 businesses, as opposed to the large swaths of the US economy that would have to buy and sell emissions in a carbon cap-and-trade scheme. The sheer size of such a program makes it much more likely for some players to find ways to game the system.

But as cap-and-trade supporters point out, tax codes are also full of loopholes, and the same lobbyists lining up to seek special treatment in a cap-and-trade plan would be mobilized to cut holes in a carbon tax as well. More importantly, taxing energy has been a proven political loser every time it’s been proposed, including in 1993, when President Clinton and Vice President Gore abandoned their calls for an energy tax after failing to generate any Republican support, and in Canada last year, when the Liberal Party’s platform plank for a national energy tax helped deal the party its worst defeat ever.

Obama has some new leverage he can use to move his climate bill forward: The Environmental Protection Agency, in compliance with a 2007 Supreme Court decision, has released a report finding greenhouse gases to endanger public health and welfare, meaning the agency has jurisdiction to regulate them under the Clean Air Act. The White House may use this to push Congress to pass a climate bill before the EPA takes matters into its own hands. That leverage may be just enough to get a program in place in time for the UN Climate Change Conference in Copenhagen this December.

In the end, a well-designed climate bill, whether cap-and-trade or a tax, could do the job of reducing emissions while keeping energy prices from becoming crushingly high. But nothing is inevitable. Continued wrangling over what is the best method to control greenhouse gases could guarantee that nothing gets done for years to come.